The seat has just been barely warmed and there are already talks of a breakup. Geez...
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New Chief Says It's Too Soon
To Discuss an H-P Break Up

By DONNA FUSCALDO
DOW JONES NEWSWIRES
March 30, 2005 11:56 a.m.

Hewlett-Packard Co.'s newly appointed chief executive, Mark Hurd, said his focus will be on optimizing all of the printer and computer giant's businesses and it's too early to decide whether to spin off any of its units.

There is "tremendous" growth and profit opportunities for H-P, Mr. Hurd said during a Wednesday conference call with analysts. He declined to comment about potential job cuts or whether he would consider breaking up H-P, as some analysts have suggested.

In response to a question about spinning off H-P's printer unit, Mr. Hurd said: "as opposed to jumping to that answer I would prefer to analyze the situation and see if there are other ways that we can … get this company to its optimal operational performance."

The former chief executive of NCR Corp. also said there were "no preconditions" on his hiring, including that he maintain the board's strategy of not breaking up H-P.

Mr. Hurd declined to give a time frame as to when he will unveil his strategy for H-P, saying he will take time to learn everything about the company first. "I very much believe being cost efficient and driving growth where appropriate," he said.

The appointment of Mr. Hurd was applauded by Wall Street watchers who said his track record at NCR bodes well for the H-P's future. Still, despite the stock's 10% surge Tuesday and the handful of H-P upgrades by Wall Street Wednesday, analysts cautioned Mr. Hurd has some tough days ahead.

H-P shares were down 1 cent to $21.77 in afternoon trading Wednesday on the New York Stock Exchange.

"H-P has strategic as well as execution problems," said Steven Milunovich, an analyst at Merrill Lynch & Co. in a research report. "He needs to be a strong strategist in deciding which businesses to emphasize and which to cut back."

Mr. Hurd is joining H-P at a time when the company is facing slackening sales and increased competition. His appointment also comes less than two months after former star CEO Carly Fiorina was forced out by H-P's board.

Many of the analysts who follow H-P said that while Mr. Hurd wasn't the obvious choice given his lack of retail experience, he's made a name for himself in turning around a struggling company and doing it with little fanfare.

"Mr. Hurd can be charismatic and aggressive but comes off as low-key," said Mr. Milunovich. "He is a blue-collar CEO, more interested in rolling up his sleeves to solve problems than appear in front of cameras. H-P employees should like and possibly be inspired by him."

Still, despite confidence in Mr. Hurd's abilities, some analysts questioned whether he will be able to take the reins of a company with 151,000 employees as confidently as he did at 28,500-employee NCR.

A lot of his skills as a detail-oriented, operations-focused manager will transfer over, says Forrester Research Inc. analyst Ted Schadler. "Scaling up will be the challenge," he said.

As for talk about the possibility of Mr. Hurd splitting up H-P, analysts said the jury is still out as to what he will do, although many think he will follow the board's vision for H-P. "He's a grower, not a destroyer," says Mr. Schadler.

Hewlett-Packard HPQ delivered third-quarter results that exceeded its initial guidance and met the revised targets it provided two weeks ago. The headline numbers are uninspiring, with total revenue of $29.7 billion, down 5% year over year, and profits tanking on a $9.2 billion noncash write-down of goodwill related to the 2008 acquisition of EDS. Nonetheless, HP delivered adjusted earnings per share of $1.00, abo ve the $0.94-$0.97 range it targeted in May. Refusing to succumb to a challenging demand environment in Western Europe, China, and the United States, HP remains on track to deliver $4.05 in adjusted EPS during fiscal 2012, and our $40 fair value estimate is unchanged. As expected, HP's segments with significant consumer exposure suffered a severe drop in revenue. Sales in the personal systems group fell 10% year over year on weak demand for PCs, led by a 12% drop in consumer revenue. A drop of this magnitude was widely expected after the results that Dell DELL reported one day earlier, but this remains a troubling rate of decline and there is little evidence to suggest that HP is executing well enough to compete in this hyperaggressive pricing environment. The imaging and printing unit saw revenue fall 3% from the prior-year period, with consumer hardware units falling 23%. On a positive note, commercial hardware unit shipments climbed 4% during the same period, suggesting that HP is beginning to offset some of the secular declines in consumer printing with some stability in commercial opportunities. Supplies revenue (toner and ink) fell 3%, but HP warned that there was a buildup in channel inventory that will hinder the results of future quarters. The software division also stands out with its failure to deliver growth. Nearly a year since the $11.7 billion acquisition of Autonomy, sequential revenue growth was flat at just under $1 billion for the quarter. This is a far cry from t he growth trajectory that HP must have expected to justify the steep price tag of this acquisition. Autonomy has good technology and is not a total write-off, but many more quarters are likely to pass before much of the firm's potential is tapped under its new leadership. The services segment remains in the middle of a multiyear turnaround and is struggling to deliver growth. Results look bleak in the shadow of the unsustainable operating margin levels of several years ago. Nonetheless, with an 11% non-GAAP operating margin this quarter, HP continues to signal that margins are no longer in free fall. Management reaffirmed that it is targeting services margins of above 10% for the current fiscal year. HP is setting and meeting targets, a critical step that was missing under the prior regime, but there is clearly a long road ahead. CEO Meg Whitman said it will take years to complete the organizational and structural changes needed to improve HP's execution. In October, investors will receive an update on HP's fiscal 2013 goals. The company's ability to reaffirm its fiscal 2012 guidance, despite a weak demand environment that has caused competitors like Dell to derail, is helping HP regain its credibility with investors. A projection of earnings growth going into fiscal 2013 could be a positive catalyst for a stock that is priced for perpetual declines.

HP HPQ reported second-quarter results that suggest signs of stability for the wounded technology giant. Our confidence in the firm's multiyear turnaround effort continues to build as the new management team implements a systematic and methodical approach to the issues HP has struggled with recently. HP also took this opportunity to announce the next step in the turnaround: a new restructuring effort that will trim its work force by 27,000 jobs. Finally, management also reaffirmed the full-year target for non-GAAP EPS of more than $4 per share, a critical step in rebuilding investor confidence. Our $40 fair value estimate is unchanged. A substantial reduction in HP's work force is the most newsworthy item from the quarter, but we view this as a necessary, and not unexpected, step in the turnaround story. HP will trim its work force by approximately 27,000 employees, or 8% of its work force. The total cost of this restructuring is expected to approach $3.5 billion, including a $1.7 billion charge that will have an impact on HP's fiscal year 2012 results. Cash outflows in fiscal 2012 related to this effort are expected to total approximately $400 million. HP expects approximately one third of the employees to exit the firm in fiscal 2012, with the remaining 18,000 to exit by the end of fiscal 2014. HP expects to generate annualized savings of $3.0 billion-$3.5 billion by the end of fiscal 2014. The majority of the savings will be reinvested back into the business. The current quarter's results were above management's guidance, but the comparison with last year's second-quarter results remains sobe ring. HP delivered non-GAAP EPS of $0.98 versus management's guidance of $0.88-$0.91 per share. Total revenue declined 3% year over year, to $30.7 billion. The PC segment fared better than rival Dell DELL, with flat year-over-year growth. The enterprise hardware division (ESSN) continued to struggle as the supply of industry standard servers (x86) was hindered by hard disk drive shortages. Furthermore, the business critical systems segment continues to fade because of Oracle's decision to withdraw support for the Itanium platform. Revenue from the printing segment dropped dramatically, falling more than 10% year over year as the firm continues to deal with channel inventory issues. Revenue from the services segment was down 1% year over year, in line with our expectations as it tackles a multiyear retooling effort. In contrast to the uninspiring revenue growth, HP delivered reason to be optimistic about its operating profits. After falling to 8.6% two quarters ago, HP's operating margin expanded to 10.2% this quarter. The path forward will not always deliver linear improvement, but investors should be gaining confidence that HP's operating results are no longer in free fall. In our opinion, outside of the European macroeconomic issues that threaten all technology firms, the biggest risk to our fiscal year 2012 forecast for HP as we enter the back half of the year is the health of the printing division. For several quarters, there have only been excuses about channel inventory issues. Now, however, management has signaled that the inventory correction is over, so the results going forward should be more representative of the printing segment's true potential. That being said, HP has underperformed its peers, and better execution is necessary to stabilize this segment. Management discussed some of the secular issues plaguing this business unit, namely the decline in consumer printing. Nonetheless, there are company-specific issues that need attention, including emerging market distribution and product pricing (hardware and ink). HP has moved past the head-in-the-sand approach to the issues, but this unit still represents a big risk point in HP's turnaround. The key takeaway from the quarter is that the headwinds facing most of HP's core business units are built into the current results. There is no second shoe that we are expecting to drop. Instead, we think there has been a permanent impairment of HP's operating margins for printers, services, PCs, and enterprise hardware. Looking ahead, we believe that the first half of fiscal year 2012 represents the new normal level of operating profitability, with upside potential during the next several years as CEO Meg Whitman puts her stamp on the firm by controlling expenses and shifting the savings into the investments that lay a foundation for success in future years.

Hewlett-Packard HPQ announced Wednesday that it will combine its PC and printing divisions in one of the largest tactical moves yet for new CEO Meg Whitman. Todd Bradley, current executive vice president of the PC group, will lead the combined entity, with printing chief and company veteran Vyomesh Joshi retiring from the firm. The company says this move is aimed at streamlining operations on both the supply chain and sales sides of the business. This restructuring effort is likely to result in a sizable reduction in head count as redundant functions are eliminated. We view this move as a small but positive step in HP's turnaround. The combined entity will account for about 50% of HP's revenue and nearly 45% of operating income. In and of itself, this move will not fix the issues facing each division, but we do believe there could be some efficiencies from a joint go-to-market strategy. The two divisions share several attributes including an overlapping addressable corporate market and HP's only consumer exposure. These two divisions also represent the hardware solutions that are the least differentiated from the competition out of HP's product portfolio and should be operated differently than the enterprise hardware and services divisions. That being said, there are clear differences. While price competition has held PC operating margins in the midsingle digits, the high-margin recurring revenue from printer supplies has enabled the printing division to deliver an operating margin in the midteens for more than a decade. This dynamic is evidenced by the uneven revenue and profit contributions, with PCs accounting for 33% of the company's revenue but just 16% of operating profit. Combining the PC and printing businesses is far from a game-changing move that will solve all the problems facing HP. However, it increases our confidence that Whitman is serious about streamlining operations and operating the business units that HP already has in place instead of trying to reinvent the company. Each of HP's main business units faced challenging conditions last quarter, but for the most part, the firm's performance was in line with our expectations and management's guidance. The primary outlier, in our opinion, was the printing segment. Though we are not convinced that the issues in this segment are resolved, it is reassuring to see that Whitman is taking steps to put these businesses on the right track. We doubt there is a fix for the secular declines in consumer printing, but HP should b e able to leverage its leading market share position to generate attractive margins from business printing for many years. HP established an earnings floor last quarter from which it can rebuild investor confidence. The next quarter holds only minor upside potential, but we expect to begin seeing earnings growth in the back half of calendar 2012 that demonstrates HP's turnaround efforts are succeeding.

Hewlett-Packard's HPQ mixed first-quarter results highlight the many challenges facing the firm as it looks to restore operational excellence to its core business units. Investors can take comfort in the fact that HP finally has a management team that is actively attacking issues and defining an inward-focused strategy to rebuild the business. However, this turnaround will be slow and painful with few opportunities for quick fixes. We view fiscal 2012 as a rebuilding year that establishes the baseline from which HP will be able to drive profitable growth. The quarter's results were in line with HP's recent guidance, but startling w hen viewed in the context of the year-over-year declines in revenue and profitability. Total revenue declined 7% year over year, with approximately half of the decline attributable to lost sales in the PC and server segments from the current hard disk drive shortage. The printing segment saw a 7% decline in revenue from the prior-year period, as supplies and hardware revenue underperformed our expectations. HP's non-GAAP operating margin fell to 8.6%, down 380 basis points year over year, as the firm struggles against external headwinds in PCs and company-specific issues in its services and printing segments. HP is working to repair its credibility by setting goals that it can meet and sticking to them. Investors breathed a collective sigh of relief as HP reaffirmed fiscal 2012 non-GAAP earnings per share guidance of at least $4.00. Failure to meet this low bar (fiscal 2011 non-GAAP EPS was $4.8, set just last quarter, would have been an unmitigated disaster for CEO Meg Wh itman as she works to restore investor confidence. Given the challenges facing HP in the first half of the year, confidence in this goal requires a leap of faith that the second half of fiscal 2012 holds significant upside relative to first-half results. Barring an economic meltdown in Europe, we still believe HP will exceed this full-year EPS target, as some of the temporary headwinds--including the hard disk drive shortages--abate. In contrast, resolving fundamental issues in the services and printing divisions will take years. The printing business delivered the most disappointing results during the first quarter and remains our greatest area of concern. There were some known issues, including secular declines in consumer printing and excess supplies inventory in the channel. Therefore, we were not surprised by a 15% year-over-year decline in consumer hardware revenue or the 6.4% decline in supplies revenue. However, the magnitude of the decline in commercial printer hard ware, with revenue down 5% year over year, exceeded our expectations. HP appears to be losing some share in this key market, partly due to its unfavorable cost structure (tied to the Japanese yen) stemming from its relationship with Canon for laser printers, but also due to poor execution. This is one area where management has not yet laid out a tangible recovery plan, and we continue to seek additional information. There are some positive forces in printing, including double-digit growth from the graphics and managed print services segments, but these are not yet large enough to offset the negative headwinds. Ultimately, success in the back half of fiscal 2012 would go a long way toward restoring investor confidence in HP. The challenges are many, but we believe this year of rebuilding puts HP on track to begin the long, slow crawl back to profitable growth.

New CEO Meg Whitman used Hewlett-Packard's HPQ fourth-quarter conference call to send a clear message to investors: Management is focused on operating the businesses that HP already owns, not lusting after acquisitions. HP faces diverse headwinds, creating an uphill climb to re-establish operational improvements, but investors finally have reason to be optimistic as Whitman looks to restore order from the chaos that has consumed HP during the past 12 months. Fourth-quarter results were slightly better than we anticipated on revenue and earnings, but with the new regime in place only eight weeks, it is the 2012 outlook that ma tters most for investors. Management guided to lower revenue and earnings in fiscal 2012, with non-GAAP earnings expected to be greater than $4.00 per diluted share, a sharp decline from the $4.88 delivered in fiscal 2011. We believe the $4.00 EPS level represents a solid target with little risk of a miss, but also allows for the investments necessary to position HP for subsequent years of EPS growth. No specific revenue guidance was given, as management looks to emphasize profitability over growth. Despite our enthusiasm for the new strategy, HP faces stiff headwinds in its core operating units, including printing, servers, and services. The printing segment's operating margin fell to just 12.8%, as sales of high-margin supplies stagnated because of excess inventory that accumulated earlier in the year. HP expects two more quarters of challenging results to work through the issue. Sales of HP's business-critical servers are now in secular decline (down 23% year over year) a fter Oracle pulled support for the platform. The decline will have a long tail, but the damage appears to be irreparable. Finally, after a long period of underinvestment, the services segment continues to underperform the industry and is facing a turnaround that will be measured in years. On top of these issues, economic uncertainty in Europe threatens to damp IT investment across the globe. Facing these issues in its core units, HP is wise to abandon the acquisition-focused transformation the former regime was pursuing. The software-focused acquisition strategy was based on promises of margin expansion and increased customer stickiness, but was fraught with overpayment and integration risk. HP's new focus on its current businesses provides less revenue and earnings growth potential but delivers greater stability. We plan to lower our fair value estimate to account for the investment required for HP's turnaround and capture the revenue trade-offs we expect HP to make as it s hifts to emphasize profitability over growth. However, we also plan to lower our fair value uncertainty rating to medium, reflecting our greater confidence in HP's ability to achieve its goals and its commitment to avoid large acquisitions and prioritize strengthening its balance sheet and returning cash to shareholders as the best uses of free cash flow.

Morningstar on HPQ's planned spin-off of its PC division and the acquisition of Autonomy.

Quote:

A flurry of rumors surfaced Thursday ahead of Hewlett-Packard's HPQ scheduled release of its third-quarter results. Responding to the chaos, HP confirmed that it is exploring strategic alternatives for the PC division, admitted defeat on its tablet and phone strategy, announced a $10 billion software acquisition, and lowered its full-year guidance for the third quarter in a row. We view the strategic moves as a step in the right direction but expect to lower our fair value estimate about 15% to reflect the firm's poor execution, which is elongating the time frame for an operational turnaround. The decision to separate the PC business via a spin-off or other transaction is a welcome announcement. For too long, HP's PC business has been a distraction for investors and management, occupying an outsize proportion of focus while contributing only 13% of operating income. The firm's economic moat is currently rooted in its services, enterprise hardware, and printing segments, while future competitive advantages will be driven by the moves currently being undertaken to build up the firm's software portfolio. As a PC assembler without any ability to differentiate its products, even the best execution would deliver minimal upside. HP clearly has more attractive opportunities to pursue with its time, cash and focus. In a surprisingly swift move, HP is also raising the white flag on its tablet and phone strategy, immediately discontinuing operations. The odds of success for webOS against Apple's AAPL iOS and Google's GOOG Android are very low, in our opinion, and attempting to make this business work would siphon off material amounts of cash better spent on the firm's software strategy. Though the delivery of devices will cease immediately, management is still looking at options to extract value from the webOS software. We attribute zero value to this activity and view the Palm acquisition as a total loss. At least HP is acknowledging the failure extremely quickly, taking steps to prevent the destruction of additional shareholder value. Looking toward the future, HP announced its intention to acquire Autonomy, a U.K.-based software firm, for about $10 billion. This acquisition is in alignment with CEO Leo Apotheker's strategic vision to build up HP's portfolio of software assets. We view the acquisition positively because it gives HP a foothold in content management, a fast-growing market that can be bundled with its infrast ructure and services offerings. Additionally, the firm is rapidly expanding its cloud-based delivery capabilities, an area HP believes is key to future success in software. Finally, because Autonomy's solutions are focused on segments that are not bundled into the larger enterprise resource planning and middleware suites, HP can secure new customers despite lacking the deep software stack that rivals like Oracle ORCL and IBM IBM can offer. Operationally, fiscal third-quarter results were mediocre, but the third consecutive reduction in 2011 guidance is wearing on the patience of investors. We continue to believe in HP's economic moat and the durability of its core hardware, services, and printing businesses. Nonetheless, we expect an operational turnaround will take well into 2012, and investor sentiment will probably remain negative until HP breaks this cycle of disappointing outlooks.

On Monday, Hewlett-Packard HPQ announced a $24 per share acquisition offer for 3PAR PAR, topping Dell's DELL $18 per share offer announced last week. We are raising our fair value estimate for 3PAR to reflect HP's offer.

3PAR is currently trading at a premium to HP's offer, which reflects the market's belief that Dell or another acquirer may come in with yet a higher bid. While Dell can certainly come in with another bid, at the end of the day 3PAR is worth more to HP than it is to Dell, given HP's existing enterprise hardware and services businesses. EMC EMC is no stranger to bidding wars, with its victory over NetApp NTAP for Data Domain, and is another potential acquirer.

Hewlett-Packard HPQ announced that it has agreed to buy networking gear maker 3Com COMS for $2.7 billion net of cash. The deal is small relative to the overall size of HP, but signals how aggressively HP and large technology players are pursuing a strategy to deliver end-to-end data center solutions instead of focusing on specific sectors.

The land grab continues in technology as big firms push beyond their historical sectors. In addition to expanding their addressable markets, these firms are hoping to drive growth and margin expansion by delivering one-stop shopping for customers. No longer happy to coexist in adjacent markets, Cisco CSCO and HP have effectively declared war on each other with Cisco pushing a new line of servers and HP pouring money into its networking business. Others are following suit, with Oracle ORCL pursuing Sun JAVA and IBM IBM strengthening partnerships with vendors such as Brocade BRCD.

Acquiring 3Com is consistent with the larger consolidation trend, and we believe it builds HP's networking presence by delivering higher-end intellectual property and setting the company up for growth. The combination of 3Com's products and HP's distribution solves two issues. First, the broader range of switching and routing products will create opportunities for HP to upsell clients where a high-end product has not been available. Second, 3Com's engineering talent will benefit from HP's distribution muscle.

Additionally, HP gains a stronger foothold in China, a market that we expect to be a key driver of IT spending during the next several years. 3Com is primarily focused on China, claiming more than 30% of the networking market and possessing a research and development center of 2,400 engineers that will help jump-start HP's tactical maneuvers to outflank Cisco. Networking has always been important to data centers, but a new focus on virtualization and cloud technologies has increased the visibility of networking bottlenecks and stirred demand for the next generation of products. We see this deal as a net positive for HP, given the firm's strategy to become a legitimate contender in the networking sector.

More layoffs at HPQ now inevitable. Also is considering writing down the goodwill from the Compaq acquisition - which basically means that the CPQ acquisition was pretty much a failure.
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H-P's Hurd Plans Big Cost Cuts

Profit Increases by 9.3%,
But CEO Advises Outlook
Be Lowered for Near Term
By PUI-WING TAM
Staff Reporter of THE WALL STREET JOURNAL
May 18, 2005

Hewlett-Packard Co. Chief Executive Mark Hurd said he plans significant cost cuts at the printer and computer maker, and urged Wall Street to lower profit expectations for the company in coming months.

Mr. Hurd, who joined H-P on April 1 to succeed the ousted Carly Fiorina, told analysts he expects to unveil a restructuring plan in the next several months. He offered no details, but the Palo Alto, Calif., company said it expects $100 million in expenses for "work-force reductions" in the current quarter ending July 29.

"H-P has a cost structure that is off-benchmark in many areas," Mr. Hurd said. "Our overall performance leaves room for improvement in many of our businesses."

The comments came as H-P reported solid fiscal second-quarter results, despite a slowdown at its highly profitable printer unit. For the three months ended April 30, H-P said net income rose 9.3%, to $966 million, or 33 cents a share, from $884 million, or 29 cents a share, a year earlier. Excluding amortization of intangible assets and other items, H-P said it would have earned 37 cents a share, slightly above analysts' estimates. Revenue increased 7.2% to $21.57 billion from $20.11 billion, slightly exceeding analysts' expectations.

Mr. Hurd said H-P expects to earn 29 cents to 31 cents in its current quarter. Analysts surveyed by Thomson First Call had been predicting earnings of 32 cents for the quarter. H-P's estimate excludes expenses related to the projected job cuts, which would reduce earnings by an additional three cents a share.

At NCR Corp., where he was chief executive for two years, Mr. Hurd typically set conservative financial targets, which the company frequently exceeded. Yesterday, Mr. Hurd said it was "appropriate" to lower profit projections because H-P's third quarter is traditionally "challenging." Poor third-quarter results last year contributed to Ms. Fiorina's dismissal in February.

Mr. Hurd said H-P expects revenue in the current quarter of $20.3 billion to $20.7 billion, slightly above analysts' expectations of $20.35 billion.

H-P reported its results after normal trading hours. In 4 p.m. composite trading on the New York Stock Exchange, H-P shares were up 54 cents, to $21.55. In after-hour trading, they rose to $22.35.

H-P's results were weighed down by the imaging-and-printing business, which typically is H-P's strongest but is under pressure from rivals such as Lexmark International Inc. and Dell Inc.

Revenue in the printing unit rose 5%, to $6.4 billion, but operating profit declined 15%, to $814 million, from $952 million a year ago. The unit offered a voluntary severance program during the quarter, which eliminated 1,900 jobs and led to $71 million in layoff costs.

The printing results "should be seen as worrisome," said Rob Cihra, an analyst at Fulcrum Global Partners. "With slowing revenue and margins under pressure, that's not the trends you want for your crown-jewel business."

But H-P posted improved revenue and earnings in its historically troubled personal-computer and business-computing units. The PC business generated revenue of $6.4 billion, up 6%, and operating profit of $147 million, up more than threefold from a year ago. The business-computing unit, with server computers and storage computers, posted revenue of $4.2 billion, up 6%, and operating profit of $184 million, up 55%.

H-P's software group reported revenue of $277 million, up 23%, and an operating loss of $6 million, narrower than the $52 million loss a year ago. H-P's services business had $4 billion in revenue, up 14%, with operating profit of $292 million, down 12% from a year ago.

Mr. Hurd said he is still evaluating whether to write down the goodwill from H-P's acquisition of Compaq Computer Corp. in 2002. Some investors have urged Mr. Hurd to write down the goodwill, an action that would essentially mark the Compaq deal as a failure.

Apart from cost cuts, Mr. Hurd said his other priorities include making the software business and certain portions of the services business profitable, and boosting the company's weak storage business. H-P said it increased wages for most employees on May 1, boosting expenses by roughly three cents a share beginning in the current quarter.